SIF-Japan 2009 Review of Socially Responsible Investment in Japan CONTENTS FOREWORD .................................................................................................................. 1 CHAPTER 1. AN OVERVIEW OF SRI IN JAPAN ......................................................... 4 CHAPTER 2. TRENDS IN PUBLICLY OFFERED SRI INVESTMENT TRUSTS ........... 8 CHAPTER 3. PENSION FUNDS AND SRI .................................................................. 14 CHAPTER 4. EVOLVING TRENDS IN SHAREHOLDER ADVOCACY ...................... 23 CHAPTER 5. THE GROWTH OF COMMUNITY INVESTING ..................................... 30 CHAPTER 6. CSR INITIATIVES BY JAPANESE FINANCIAL INSTITUTIONS .......... 36 SIF-Japan 2009 Review of Socially Responsible Investment in Japan Foreword An “eco-fund” launched in 1999 was Japan’s first financial investment product to consider the environment. Much has happened in ten years, and it now gives us great pleasure to announce the release of the 2009 Review of Socially Responsible Investment in Japan, our second such report. When initially launched, the eco-fund concept attracted much media coverage and public interest. Over the past ten years, through the many efforts of fund management firms, financial institutions, and many other interested parties, the playing field has expanded rapidly, not only with eco-funds focused mainly on Japanese equities but also socially responsible investment (SRI) funds that more broadly evaluate corporate social responsibility (CSR) efforts, bond-centered products, index funds, “green” real estate investment products, micro-finance investments, and so on. The fact that Social Investment Forum Japan (SIF-Japan) has just reached its seventh year is something I would like to take as a sign that the concept of socially responsible investment has permeated throughout Japan. Meanwhile, if we look at trends in the world in the intervening years we can see that the SRI market is growing rapidly, with the creation of the United Nations Principles for Responsible Investment (PRI) giving added momentum. The terminology has also changed from “socially responsible investing” to "sustainable investing," “ESG” investing (which considers environmental, societal, and governance issues), or “responsible” investing, and the objectives have also evolved—from SRI arising from ethics and social justice, to rational investing to create a sustainable society. With the growth of the SRI market as well as national laws and regulations, ESG investing has been broadly accepted even by mainstream investors—most notably, public pension funds—and in fact it has grown into a huge market, surpassing euro €2.665 trillion in Europe and $2.71 trillion in North America in 2007. The global economic crisis, including the bankruptcy of the global financial-services firm Lehman Brothers (referred to in Japan as the “Lehman Shock”), dealt a heavy blow to the SRI market. All the data is not yet in about the actual extent of the negative impacts, but by some estimates, given that market has contracted by 40 percent, it is still in the range of about JPY 300 trillion. Meanwhile, there are new efforts in countries such as Korea, Brazil, and Thailand to actively promote ESG investments, and the market is expected to grow further. Turning our attention now from global to Japanese trends over the past ten years, one could say that the lineup of SRI funds has indeed expanded in this country, but some of this was a matter of hype. Total managed assets have yet to reach the trillion-yen mark, and three 1 SIF-Japan 2009 Review of Socially Responsible Investment in Japan asset owners and nine fund managers are the only financial institutions to have signed the Principles for Responsible Investment. Perhaps there are two ways to see this situation. Was this a lost decade in Japan, when SRI simply got renamed as ESG investing but still did not take root? Or was it a decade of preparation for dramatic growth in the future? We prefer to believe it was a decade of preparation for a big advance in the future. In the first place, savings account for 50 percent of personal financial assets in Japan, and there was in the past only a thin segment of individual investors engaged in long-term equity investing, so investor education is still a work in progress here, but it was very difficult to have pension funds and other institutional investors accept the idea of SRI, which is best suited to the concept of long-term investing. Right from the first launch of eco-funds, it has been the individual investors who understood environmental and social issues and supported SRI. Slight changes have become evident, however. Japanese society has unquestionably begun to move. For example, the Japanese Trade Union Confederation—which has a very close relationship with the Democratic Party of Japan (now Japan’s ruling party)—has begun work to develop SRI guidelines, and companies such as Bloomberg and Thomson Reuters now provide ESG information to investors via their financial information terminals. As I write this in January 2010, just more than a year has passed since the “Lehman Shock,” financial markets are returning to normalcy, and we are moving toward a low-carbon society with a 25 percent reduction in carbon dioxide emissions by 2020. I expect that stronger tailwinds will be supporting investments paying attention to SRI and ESG. In this context, one might say the timing of this publication is very appropriate. Our first issue, published in 2007, was cited in the Annual Report on the Environment by Japan’s Ministry of the Environment, as well as in the media and many other places, making it the most trusted source of SRI information in Japan. To raise the bar even higher, the writing team for this second issue asked members of this Forum and leading Japanese experts in their respective fields to contribute content for each chapter, resulting in a considerable increase in the number of pages. This effort is primarily a reflection of everyone’s strong desire to encourage ESG investment in Japan, and it is thanks to the support of colleagues such as these that SIF-Japan has made it through the past seven years. For all of this we are truly grateful. For the publication of this report we received special support from Daiwa Securities Group Inc., FTSE Group, Sumitomo Mitsui Banking Corporation, support from Sompo Japan Insurance Inc., and information and data provision from Mercer Japan Ltd. I must also mention that we receive support on a day-to-day basis for the activities of SIF-Japan from premium members the Sumitomo Trust & Banking Co., Ltd, Cre-en Inc., Seven & i Holdings Co., Ltd., Bloomberg L.P., Integrex Inc., and Nikko Asset Management Co., Ltd., and also financial assistance from the Trust Sixty Foundation. To all of these supporters we express 2 SIF-Japan 2009 Review of Socially Responsible Investment in Japan our deep gratitude. We hope that the next decade will be a time of great progress in Japan for socially responsible investment and that this report will be widely used to serve as a foundation for that progress. January 2010 Chief Executive & Secretary General of Mariko Kawaguchi Social Investment Forum Japan Editorial Committee members Chief Editor Minako Takaba Committee members and authors Akemi Yamasaki Hitoshi Yokozuka Kazuyuki Tsuchiya Mari Onojima Megumi Terayama Shunji Taga Tetsuro Yoshida Toshiaki Yamamoto Toshitaka Saotome Yoko Monoe Deputy Director Hiroshi Matsuzawa Secretariat staff Ryoko Michikawa Disclaimers The information contained in this document is offered solely for information purposes. It is provided neither to promote securities transactions nor to recommend any securities investments. We offer no guarantees regarding the accuracy or completeness of any information presented, which may change without notice. Although the utmost effort was made to ensure the accuracy of information and figures in this document, we assume no responsibility for any damages arising directly or indirectly from errors and omissions, or from any decisions or actions taken based on this information. Copyright All rights relating to this document are reserved by Social Investment Forum Japan (SIF-Japan). No part of this document may be reproduced, copied, or distributed in any form without prior consent from SIF-Japan. Translator: Randal Helten, Helten Communications, Inc. 3 SIF-Japan 2009 Review of Socially Responsible Investment in Japan Chapter 1. An Overview of SRI in Japan The terms socially responsible investment (SRI) and environmental, social, and governance (ESG) issues are gaining currency in Japan, but in general information is not widely available about SRI, making it difficult to accurately ascertain the current situation. Recognizing those conditions, the aim of this report is to provide information on trends concerning SRI in Japan using the greatest possible range of data. The very definition of SRI has yet to be firmly established, but for the purposes of this report, we have defined SRI using two criteria: (1) investments for which it is possible to confirm the intention of the ultimate provider of funds being invested, and (2) investments for which one or more of the ESG (environmental, social, governance) factors are considered in the investing process. The Japanese SRI market at the time of our previous report at the end of 2007 was estimated at about JPY 850 billion. As is clear from these numbers, there was already a huge gap between Japan and Europe/North America in terms of the size of the market, but with the Japanese market estimated to be down to JPY 578.7 billion in 2009, it has obviously contracted in a sluggish stock market. As shown in Figure 1-1, publicly offered SRI investment trusts account for nearly 90 percent of Japan’s SRI market. The remaining nearly 10 percent is the SRI management of pension funds, while shareholder advocacy to address environmental and social issues accounts for less than 1 percent of the market. Finally, though not included in these numbers, the community investment sector (investment activities with the goal of contributing to local communities) is dynamic and rich in diversity, though its financial impact may be small.